KUALA LUMPUR: After two consecutive years in the black, Malaysian Airline System Bhd (MAS) is likely to swing into losses for its financial year ended Dec 31, 2009 (FY09) due to costly fuel hedges and a weakened global economy that eroded travel demand and passenger yields.

But some analysts argued the airline, which is scheduled to announce its fourth-quarter and annual results later today, would remain profitable in FY09 due to huge derivative gains.

So, would it be red or black ink for MAS in FY09? ECM Libra analyst Bernard Ching forecast that MAS would post a net profit of RM254.2 million, after taking into account a derivative gain of some RM1.16 billion.

This means Ching still expects some RM906 million in operating loss for the airline, which is consistent with most of his industry peers.

However, many industry analysts do not see MAS remaining in the black. RHB Research, in a December note, estimated that the airline would post a net loss of RM805 million while CIMB Research expects the national carrier to post a narrower net loss of RM375.7 million.

Bloomberg’s consensus, meanwhile, estimated a net loss in the region of RM790 million.

An analyst with a local broking house said the derivative loss booked by MAS in the first quarter of FY09 was enough to drag the airline, already hit by eroding yields and load factors, into the red.

Following the early adoption of FRS 139, MAS posted a net loss of RM695.4 million in 1Q09 due to a derivative loss of RM557 million in the quarter. MAS had also charged RM3.8 billion of fuel hedge losses on its balance sheet to reflect the fair value of its fuel hedges effective Jan 1, as required by the new accounting rule.

Without the adoption of FRS 139, however, the loss to be booked by the airline is believed to be even bigger.

K&N Kenanga and CIMB expect the national carrier to post a whopping net loss of over RM2 billion for FY09 if it had not adopted the new accounting standard. FRS 139 governs the way financial derivatives are accounted and disclosed, including mark-to-market (MTM) gains and losses in hedging activities that can impact a company’s bottom line.

In MAS’ case, the accounting treatment on its fuel-hedging contracts is one area to watch out for.

MAS hedged 57% of its fuel requirement for the remainder of 2009 at US$90 a barrel and 60% of its fuel needs at US$100 per barrel for 2010. It is difficult to gauge the impact of unrealised MTM fuel hedge losses or gains on MAS’ profit and loss statement. But one thing is certain: FRS 139 is an accounting entry that will not impact the cash flow statement of MAS. Therefore, analysts argue that investors should monitor the operating cash flow when evaluating the airline.

“Although derivative gain or loss would not impact cash flow, it certainly encourages MAS to be more prudent in managing its balance sheet,” an analyst said.

In this light, analysts are pleased that MAS had undertaken a rights issue to raise some RM2.7 billion to strengthen its balance sheet. Nonetheless, MAS’ shares came under some selling pressure recently, with the stock hitting its lowest level since 2002 last week.

Perhaps it reflected the uncertainty surrounding MAS’ ability to remain profitable and to improve its seat yields and expand its network as the travel industry heads towards recovery.

However, some analysts believe the fall in MAS’ share price was partly induced by investors seeking arbitrage opportunities on the rights. Trading in the entitlement to MAS rights began on Feb 11 at 16.5 sen each and ends today. The rights shares are priced at RM1.60 apiece. The counter ended the week down nine sen at RM1.80.

Based on Bloomberg data, MAS has had underweight, underperform and sell calls since January with target prices ranging from RM1.46 to RM2.44.


This article appeared in The Edge Financial Daily, February 22, 2010.